LONDON — The euro’s plunge against the
dollar, triggered by the
Ukraine war and mounting risks to the EU economy, has
driven the two currencies to parity for the first time in two decades.
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The European single currency sank to $0.9952 on
Thursday — a level not seen since the end of 2002, the year it was officially
introduced.
But traders believe the euro could recover, provided
it clears several hurdles in the coming months.
The first to get over is to avoid the risk of a halt
in
Russian gas supplies to Europe, which would cause electricity prices to soar
and force eurozone countries to limit some industrial activity.
“If gas flows from Russia normalize, or at least
stop falling, following the end of the Nord Stream 1 maintenance shut-down next
week, this should somewhat decrease market fears of an imminent gas crisis in
Europe,” Esther Reichelt, an analyst at Commerzbank, told AFP.
With Russian gas giant Gazprom having warned it
cannot guarantee that the pipeline will function properly, European countries
fear that Moscow will use a technical reason to permanently halt deliveries and
put pressure on them.
French President Emmanuel Macron even said on
Thursday that Russia was using energy “as a weapon of war”.
If Nord Stream 1 “doesn’t turn back on, the euro
falls as the economic shock waves will be felt worldwide as the European energy
crisis could very well trigger a recession,” warned Stephen Innes, an analyst
at SPI Asset Management.
ECB wake-up call
“Recession would inevitably
mean that the market becomes even more concerned about fragmentation risks in
the eurozone,” added Jane Foley, a foreign exchange specialist at Rabobank.
Like other central banks, the
European Central Bank (ECB) is seeking to avoid stifling the economy by raising rates too sharply.
But it also has to worry about a possible
fragmentation of the debt market, with large differences in borrowing rates
across the eurozone.
The ECB has so far maintained an ultra-loose
monetary policy to support the economy, while the
US Federal Reserve has
instead raised rates and promises to continue to do so to counter inflation.
It will announce its monetary policy decision on
Thursday, and has indicated that it will raise rates for the first time in 11
years.
“If the ECB is aiming to give the euro a boost, it
will have to deliver a 50-bp hike in July and/or signal that 75-bp moves are on
the cards for September,” S&P analysts said in a note.
“Speedier policy adjustments now would help anchor
inflation expectations, reducing the risk of needing a restrictive policy
stance further down the line,” they added.
Fed slowdown
For economists at Berenberg, the euro’s fall is more attributable to the
strength of the dollar, which has “appreciated strongly against a broad basket
of currencies since mid-2021”.
The dollar has benefited from the Fed’s tightening
of monetary policy as it tries to limit inflation, which hit record highs again
in June.
“Markets are
speculating that the Fed may raise rates by 100bp instead of 75bp at its next
meeting on 27 July,” noted Berenberg.
“If so, this could
strengthen the dollar further.”
UniCredit added:
“Towards year-end, prospects of declining inflation and more-balanced messaging
from central banks as the cyclical peak of official rates nears should support
a return of risk appetite and ease US dollar demand.”
Should that happen, the euro could move away from parity in
the last few months of 2022, they say.
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